Enforcement risk

Inside

“There’s only one thing worse than being stuck in a dispute with the tax authority. That’s being stuck between two competent authorities who won’t budge or are even telling you that they will give you [the taxpayer] a deal if you agree to give something up.” —Tax director of a well-known consumer products company

In previous surveys we tracked how the enforcement of tax law and regulation has grown more robust, occasionally becoming aggressive. This slow build of pressure has many forces pushing it onward. Government deficits remain stubbornly high.

Tax authorities are both collaborating and sharing more information with one another and are increasing their focus on cross-border transactions. And finally, the constant media and political focus outlined earlier may be prompting tax authorities to feel they need to be more forceful with business.

Given its prevalence— not to mention significant media focus and the fact that it sits at the heart of the BEPS agenda — it is unsurprising that survey respondents identified transfer pricing as their leading source of tax risk. Indirect taxes ranked second, reflecting ever-growing popularity of this tax type with policymakers.

And permanent establishment risk, the third-highest perceived tax risk, reflects the ongoing forays into new markets for companies looking to expand their supply chain and customer base. In our 2011 survey, we reported that 57% of the largest companies felt that tax audits had become more aggressive and frequent in the preceding two-year period (i.e., 2009-11). In our 2014 survey, this figure accelerates to 69%.

Fifty-eight percent of companies report they have experienced a trend toward stricter tax audits or assessments relating to VAT or other indirect taxes. This figure climbs to 71% for Asia-Pacific-based companies and 74% for BRIC-based businesses.

But at the same time as these “underlying” pressures continue to build and layer upon each other, many survey respondents report a new risk as forces continue to collide: the galvanizing effect on tax administration of the OECD’s BEPS agenda. Many companies report that tax administration approaches seem to be changing ahead of any law changes that may be made as a result of BEPS recommendations.

These early actions may actually threaten the coherence of the overall BEPS project, and where a law has already been changed, will create additional uncertainty once the BEPS recommendations reach implementation stage.

While some changes (such as new or strengthened GAAR rules) are written directly into law, others are far more subjective and difficult to identify, let alone manage. Seventy-four percent of respondents, for example, report that taxing authorities are now challenging existing structures due to changes in the law or in their enforcement approach.

APAs have long been a way for tax authorities and taxpayers to mutually agree on a way to reduce risk and, therefore, the volume of disputes in relation to transfer pricing. But many respondents report that APAs are now becoming far more difficult to secure; among Americas-based companies expressing an opinion, this was the case for 63% of respondents.

Much the same challenges are being experienced in the area of cooperative compliance, the framework approach designed to reduce not only transfer pricing risk, but risk across all tax types. Despite efforts by the OECD to drive higher adoption of cooperative compliance programs, dramatically fewer companies in the latest survey say they have experienced one or more tax administrators seeking to develop a more open and collaborative relationship — a 52% drop, from 56% in 2011 to 27% now.

While these changing environmental conditions challenge those on the mountain face today, more experienced climbers are already looking to what may be over the horizon. Disputes tie up resources, are costly for all involved and can irreparably damage relationships. They are in no one’s interest.

The future coherence of the BEPS Action Plan is therefore as important to business as it is to the OECD and to governments. There is a direct correlation between the level of collective action achieved and the level of tax disputes globally.

Official statistics in relation to tax disputes are typically not published by tax authorities. However, the health of the Mutual Agreement Procedure (MAP) between countries can be a useful indicator of well-being of the tax system.

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